This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, click the "Reprints" link at the top of any article.

IRS Nixes Repatriation Tax Strategy

Agency rules out certain deals that let U.S. companies skip paying tax when using offshore cash.

The U.S. Internal Revenue Service will prevent companies from entering into transactions that allow them to tap their offshore cash stockpiles without paying taxes, the government said.

“The IRS and the Treasury Department believe that these transactions raise significant policy concerns,” the agencies said in a notice Friday.

The government plans to write regulations to enforce the change, and those rules will take effect Friday.

“This is what they do when they want to close down a transaction they find objectionable and they don’t know exactly how they want to do it,” said Robert Willens, a corporate tax consultant in New York.

Companies owe U.S. taxes on income they earn around the world after receiving credits for foreign taxes paid. Under U.S. tax law, they must pay those taxes only when they repatriate the income.

That system has led companies including Google Inc., Microsoft Corp. and Pfizer Inc. to keep foreign profits outside the U.S. Data compiled by Bloomberg in March showed that 70 companies have $1.2 trillion in untaxed profits around the world, up 18.4 percent from a year earlier.

Those companies and others lobbied Congress unsuccessfully in 2011 for a temporary tax holiday on repatriated profits. Republicans including presidential candidate Mitt Romney favor changing the tax system permanently to allow companies to bring most overseas profits into this country without facing the residual U.S. tax.

Two Transactions

The IRS notice describes two types of transactions it is trying to prevent and says the agency is “aware” that taxpayers are engaging in them. One involves selling a patent from a U.S. company to a foreign subsidiary without triggering an immediate U.S. tax.

In the other type of transaction, a company uses its offshore money to purchase a U.S. company and quickly reorganizes to move the purchased company outside the U.S.

Willens said the second transaction is likely the way that New Brunswick, New Jersey-based Johnson & Johnson used one of its foreign subsidiaries to purchase Synthes Inc., based in West Chester, Pennsylvania.

In a June 12 filing with the Securities and Exchange Commission, Johnson & Johnson said it believed the Synthes transactions would be tax-efficient.

“It is possible that the Internal Revenue Service could assert one or more contrary positions to challenge the transactions from a tax perspective,” the company wrote. “If challenged, an amount up to the total purchase price for the Synthes shares could be treated as subject to applicable U.S. tax at approximately the statutory rate to Johnson & Johnson, plus interest.”

The IRS announcement, Willens said, makes it impossible for other companies to follow.

“The hope was that this would be a viable strategy for a year or two,” he said.

Treasury & Risk

Treasury & Risk is an online publication and robust website designed to meet the information needs of finance, treasury, and risk management professionals. Our editorial content, delivered through multiple interactive channels, mixes strategic insights from thought leaders with in-depth analysis of best practices, original research projects, and case studies with corporate innovators.